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Sage is in talks with Microsoft over a strategic alliance to put its accounting software for small businesses on to the US company’s Azure cloud platform, according to people familiar with a plan. It is a move that would help the UK company hasten its shift to providing software over the internet.
Such an alliance could help answer growing criticism that the UK’s largest listed software company by market capitalisation has not embraced the trend of delivering software over the internet quickly enough.
Guy Berruyer, who took over the chief executive role in 2010, raised hopes of a shake-up at Sage, with promises to expedite the development of internet-based, or cloud software. So far this has mainly involved the launch of an online accounting software product in January 2011. But this has yet to be introduced in the US, which has the most rapid take-up of cloud services. At the end of 2011, Sage indicated it had about 1,000 cloud customers, a tiny fraction of its 6.3m customer base. It has not disclosed its revenues from these clients.
Internet-based accounting software start-ups, such as KashFlow, are making rapid growth, albeit from a low base.
KashFlow has doubled its revenues every year for the past three years, with annual sales now around £2m.
“People are moving to the cloud, that has been obvious for the last 10 years,” said Richard Holway, chairman of TechMarketView, the research group, adding that Sage appears to have had such a dominant model that it did not need to adapt. “But now the upstarts are coming to eat their lunch.”
Concerns over Sage’s growth prospects prompted analysts at brokerages including Investec, Peel Hunt and Jefferies, to shift to “sell” recommendations on the stock.
“They do seem to have lost their way,” said Mr Holway. “There are two routes now for Sage. Either they really get their act together with their cloud strategy, or you could argue that Sage would be better off being bought by a company such as Microsoft.”
Sage, which is searching for a new chairman, has grown not much above the rate of the overall economy in the past few years, with organic revenue growth of about 4.4 per cent last year.
Analysts are now expecting growth this year to be somewhere in the region of 2.5-3.5 per cent. Overall customer numbers have grown by just 500,000 since 2008. Before this growth was more than 300,000 every year helped by acquisitions, according to the company’s annual reports.
“Growth hasn’t been quite as quick as people were looking for at the beginning of the year,” says Will Wallis, an analyst at Numis. “The overall economic conditions haven’t improved and there is a question of whether the company is losing market share to cloud-based rivals.”
Mr Berruyer has extracted the company from its disastrous foray into the US healthcare market, selling its healthcare software unit last September, albeit for less than it had paid for the business in 2006.
But analysts have been waiting to see more activity on Sage’s cloud strategy. An alliance with Microsoft would be one step towards this.
Sage declined to comment on the potential alliance, while Microsoft was not immediately available for comment.
On the acquisition front Mr Berruyer has also had mixed success. The company pulled back from two potential deals, one for Team Systemes in Italy and one for MYOB in Australia.
It is now embroiled in a lawsuit with the former private equity owners of MYOB, who claim that Sage backed away from a binding agreement to acquire the company.
Sage has rejected the claim.
Analysts have been left wondering whether the company, which has historically grown mainly through clever acquisitions, can continue this strategy.
“Going back 10 years Sage was very good at tuck-in acquisitions, buying its largest rival in different countries,” said r Wallis.
“But now that market has gone away and the acquisitions that are left are either large and expensive or strategic technology acquisitions that are smaller but still expensive. Sage has not been as good at leveraging those.”
A share buy-back programme over the past few months has helped keep shareholders contented, but the share price has dropped 3.9 per cent this year, in contrast with the FTSE’s technology index, which has gained 9.4 per cent.